# Institutional Eligibility; Student Assistance General Provisions; Federal Family Education Loan Programs; Final Rule DEPARTMENT OF EDUCATION

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URL: https://www.frixlaw.com/law-library/documents/fr%3A94-29048

## Record

- **Collection:** Federal Register
- **Document type:** Uncategorized Document
- **Published:** November 29, 1994

## Text

SUMMARY: The Secretary amends the Institutional Eligibility
regulations, the Student Assistance General Provisions regulations, and
the Federal Family Education Loan (FFEL) Program regulations to further
implement changes in the Higher Education Act of 1965, as amended
(HEA), and to improve the monitoring and accountability of institutions
and third-party servicers participating in the student financial
assistance programs authorized by Title IV of the HEA (Title IV, HEA
programs). These regulations seek to improve the efficiency of Federal
student aid programs and, by so doing, to improve their capacity to
enhance opportunities for postsecondary education.

EFFECTIVE DATE: These regulations take effect on July 1, 1995, with the
exception of Sec. 668.9(b), which is effective as of July 1, 1994.
However, affected parties do not have to comply with the information
collection requirements in Secs. 668.3, 668.8, 668.15, 668.16, 668.22,
and 668.23 until the Department of Education publishes in the Federal
Register the control numbers assigned by the Office of Management and
Budget (OMB) to these information collection requirements. Publication
of the control numbers notifies the public that OMB has approved these
information collection requirements under the Paperwork Reduction Act
of 1980.

FOR FURTHER INFORMATION CONTACT: Wendy Macias or Greg Allen, U.S.
Department of Education, 600 Independence Avenue, S.W. (Regional Office
Building 3, Room 4318), Washington, D.C. 20202-5343. Telephone (202)
708-7888. Individuals who use a telecommunications device for the deaf
(TDD) may call the Federal Information Relay Service (FIRS) at 1-800-
877-8339 between 8 a.m. and 8 p.m., Eastern time, Monday through
Friday.

SUPPLEMENTARY INFORMATION: On April 29, 1994 the Secretary published
interim final regulations (denominated final regulations) amending the
Student Assistance General Provisions regulations and the regulations
for the Federal Family Education Loan Programs and the Federal Pell
Grant Program (59 FR 22348). These regulations became effective on July
1, 1994. At the time these final regulations were published, the
Secretary requested additional public comment on whether further
changes in the regulations were warranted. A notice correcting the
regulations and extending the comment period until July 28, 1994 was
published on July 7, 1994 (59 FR 34964).
Based on the comments received, the Secretary is making further
changes in the regulations. These changes will take effect July 1,
1995. The Secretary also received comments on other provisions of the
regulations and may make further changes in the regulations based on
these comments. However, if the Secretary determines that additional
changes are necessary, these future changes would not become effective
before July 1, 1996.
The Higher Education Amendments of 1992, Pub. L. 102-325, (the
Amendments of 1992) and the Higher Education Technical Amendments of
1993, Pub. L. 103-208 (the Technical Amendments of 1993) amended the
HEA in several areas relating to the participation of institutions in
the Title IV, HEA programs. Further, the Amendments of 1992 amended the
HEA to expand the Secretary's authority to regulate the activities of
those individuals and organizations now called third-party servicers.
The Student Assistance General Provisions regulations contain
requirements that are common to educational institutions that
participate in the Title IV, HEA programs.
The April 29, 1994 final regulations included a discussion of the
major issues which will not be repeated here. The following list
summarizes those issues and identifies the pages of the preamble to the
April 29, 1994 final regulations on which a discussion of those issues
can be found:
The Secretary clarified the terms used in the statutory definition
of academic year (pages 22351 and 22361-22363);
The Secretary added a definition of third-party servicer as
applicable to those individuals or organizations that contract with an
institution to administer any aspect of the institution's participation
in the Title IV, HEA programs (pages 22364-22365);
The Secretary amended the definition of an eligible program to
implement statutory requirements, including requirements for ``short-
term'' programs (at least 300 but less than 600 clock hours) that would
be eligible for the FFEL programs only. The Secretary included
methodologies for the measurement of completion and placement rates for
short-term programs, as required by the statute. Also in accordance
with the statute, the Secretary added further provisions to evaluate
the quality of short-term programs. The Secretary also amended the
provisions for English as a second language programs (pages 22351-22352
and 22365-22368);
The Secretary added two new sections to codify procedures with
regard to applications to participate initially or to continue to
participate in a Title IV, HEA program and procedures by which the
Secretary certifies that an institution meets the standards in subpart
B of these regulations and accordingly may participate in a Title IV,
HEA program. The Secretary added procedures to codify new statutory
provisions governing provisional certification procedures for
participation in a Title IV, HEA program (pages 22352-22353 and 22368-
22374);
The Secretary amended the regulations governing program
participation agreements to include numerous new provisions added by
the Amendments of 1992 and provisions previously prescribed by the HEA
but not specifically spelled out in the regulations. The Secretary also
added provisions to amend the regulations governing program
participation agreements (pages 22353 and 22374-22377);
The Secretary made significant changes to the section governing the
evaluation of an institution's financial responsibility. The Secretary
strengthened the factors used to evaluate an institution's financial
responsibility to reflect statutory changes (pages 22353-22354 and
22378-22383);
The Secretary strengthened and expanded the standards of
administrative capability for participating institutions, addressing
areas previously not regulated or for which there were only guidelines
(pages 22354 and 22383-22391);
The Secretary amended the provisions governing default reduction
measures to reflect statutory changes made by the Amendments of 1992
and current departmental practices (pages 22355 and 22391-22394);
The Secretary clarified the terms used in the statutory definition
of a fair and equitable refund policy (pages 22355-22359 and 22394-
22401);
The Secretary implemented the statutory requirement that
institutions have annual compliance audits (pages 22359 and 22401-
22403);
The Secretary expanded the factors of financial responsibility of
an institution to take into consideration substantial control over both
institutions and third-party servicers (page 22381);
The Secretary implemented annual audit requirements for third-party
servicers as necessary to implement statutory provisions under the
Amendments of 1992 (pages 22401-22403);
The Secretary amended the regulations to require a third-party
servicer to notify any institution under whose contract the third-party
servicer is assessed a liability and any institution that receives the
same services for which a liability was assessed, of the assessment of
the liability against the servicer (page 22408);
The Secretary created a new section to codify contract requirements
between institutions and third-party servicers. As one of the
conditions in the contract, a third-party servicer is required to
assume joint and several liability with an institution that the
servicer contracts with for any violation by the servicer of any Title
IV, HEA program requirement (pages 22405-22407);
The Secretary amended the regulations to apply against a third-
party servicer the sanctions under subpart G of the Student Assistance
General Provisions for any violation of a Title IV, HEA program
requirement (page 22408);
The Secretary amended the regulations to apply fiduciary standards
to third-party servicers so that a third-party servicer is required to
act at all times with the competency necessary to qualify as a
fiduciary (pages 22408-22409);
The Secretary amended the regulations to require a third-party
servicer that contracts with a lender or guaranty agency to assume
joint and several liability for any violation of any FFEL program
requirement or applicable statutory requirement. Collection of
liabilities from the violation would be collected first from the lender
or guaranty agency (page 22415);
The Secretary added a new section to codify Federal requirements
for third-party servicers that contract with lenders or guaranty
agencies. A third-party servicer is required to meet certain standards
of financial responsibility and administrative capability to be
considered eligible to contract with a lender or guaranty agency. In
addition, this section implements statutory authority to require that a
third-party servicer must have performed an annual audit of the
servicer's administration of a lender's or guaranty agency's
participation in the FFEL programs (pages 22415-22416); and
The Secretary amended the Federal Pell Grant Program regulations to
implement section 487(c)(7) of the HEA that provides that an
institution may offset the amount of Title IV, HEA program
disbursements against liabilities or may receive reimbursement from the
Department for those amounts if, in the course of any audit conducted
after December 31, 1988, the Department discovers or is informed of any
Title IV, HEA program assistance (specifically, Federal Pell Grant
Program funds) that an institution has provided to its students in
accordance with program requirements, but the institution has not
previously received credit or reimbursement for these disbursements
(pages 22416-22417).

Substantive Changes to the Final Regulations

PART 668--STUDENT ASSISTANCE GENERAL PROVISIONS

Subpart A--General

Section 668.2 General Definitions

Academic Year
In the April 29, 1994 final regulations, the Secretary addressed an
abuse of the definition of an academic year whereby an institution that
has programs that are measured in credit hours without terms could
claim that it meets the requirements for the minimum amount of work to
be performed by a full-time student over an academic year by giving a
full-time student a minimal amount of instruction over a 30-week (or
more) period, which the institution claims to be equivalent to 24
semester or 36 quarter hours. A modification was made to require that,
for educational programs using credit hours, but not using a semester,
trimester, or quarter system, a week of instructional time is any week
in which at least five days of regularly scheduled instruction,
examinations, or preparation for examinations occurs, as opposed to one
day of regularly scheduled instruction, examinations, or preparation
for examinations for all other programs. In response to public comment,
the Secretary has amended the definition of an academic year to require
that, for educational programs using credit hours, but not using a
semester, trimester, or quarter system, a week of instructional time is
any week in which at least 12 hours of regularly scheduled instruction,
examinations, or preparation for examinations occurs. A corresponding
change has been made to the definition of an eligible program in
Sec. 668.8(b)(3)(ii). Third-party Servicer.
In response to public comment, the definition of third-party
servicer has been amended to specifically exclude the function of
providing computer services or software. This change merely codifies
the Secretary's determination in the preamble to the April 29, 1994
final regulations, that the function of providing computer services or
software is simply a technological means to assist in carrying out
certain administrative functions that are already included in the
definition third-party servicer under this part.
In response to public comment, the definition of third-party
servicer has been modified to expressly exclude employees of an
institution. For purposes of determining which individuals are
employees of an institution, with respect to administering any aspect
of an institution's participation in the Title IV, HEA programs, the
regulations now specify that an employee is an individual that works on
a full-time, part-time, or temporary basis at the institution; performs
all required duties that are relevant to the administration of the
institution's participation in the Title IV, HEA programs on site at
the institution under the supervision of the institution; is paid as an
individual directly by the institution; is not employed by or
associated with a third-party servicer; and is not a third-party
servicer for any other institution.

Section 668.3 Reductions in the Length of an Academic Year.

In the April 29, 1994 final regulations, the Secretary promulgated
regulations to implement the technical amendment that provided that the
Secretary may reduce, for good cause on a case-by-case basis, the
required minimum of 30 weeks of instructional time to not less than 26
weeks of instructional time in the case of an institution of higher
education that provides a 2-year or 4-year program of instruction for
which it awards an associate or baccalaureate degree. In response to
public comment the Secretary has amended Sec. 668.3(c) to clarify that
an institution may apply for a longterm reduction in the length of an
academic year if it wishes to continue operating with a reduced
academic year on a longterm basis. An institution's other option would
be to ask for a temporary reduction in the length of an academic year
while the institution changes to at least a 30 week academic year. The
Secretary notes that Sec. 668.3(c)(2) requires an institution that is
granted a longterm reduction in the length of an academic year to
reapply to the Secretary in order to continue the reduction whenever
the institution is required to apply to continue to participate in a
Title IV, HEA program.
The April 29, 1994 final regulations require that an institution
applying for a transitional or longterm reduction in the length of an
academic year must demonstrate that the institution has awarded,
disbursed, and delivered Title IV, HEA program funds in accordance with
the academic year requirements in section 481(d) of the HEA since July
23, 1992, as the requirements became applicable to the various Title
IV, HEA programs. In response to public comment, the Secretary has
added Sec. 668.3(d) to specify that an institution may demonstrate
compliance with this requirement by making arrangements that are
satisfactory to the Secretary to repay any overawards that resulted
from the improper awarding, disbursing, or delivering of Title IV, HEA
program funds.

Section 668.8 Eligible Program

English as a Second Language (ESL)
In response to public comment, the Secretary has removed
Sec. 668.8(j)(2) that required an institution to assess each student at
the end of an ESL program to substantiate that the student has attained
adequate proficiency in written and spoken English to use already
existing knowledge, training, or skills.
Undergraduate Educational Program in Credit Hours.
In response to public comment, the clock-hour/credit-hour
conversion regulations have been amended to reinstate the exemption
from the clock-hour/credit-hour conversion formula for programs of at
least two academic years in length that lead to an equivalent degree,
as determined by the Secretary. A similar change has been made for
programs offered by an institution that are fully creditable toward
that institution's equivalent degree, as determined by the Secretary.

Section 668.9 Relationship Between Clock Hours and Semester,
Trimester, or Quarter Hours in Calculating Title IV, HEA Program
Assistance

On October 20, 1994, Pub. L. 103-382 was signed by the President of
the United States. Pub. L. 103-382 amends the HEA to specify that
public or private nonprofit hospital-based diploma schools of nursing
are exempt from any regulations promulgated by the Department
concerning the relationship between clock hours and semester,
trimester, or quarter hours in calculating student grant, loan, or work
assistance under Title IV of the HEA. Accordingly, this section is
amended to provide for that exemption. This provision took effect on
July 1, 1994.

Subpart B--Standards for Participation in the Title IV, HEA
Programs

Section 668.12 Application Procedures

In response to public comment, the Secretary has revised
Sec. 668.12(b) to no longer automatically require an institution to
apply to the Secretary for a certification that the institution
continues to meet the standards for participation in the Title IV, HEA
programs if the institution adds an additional location that offers 100
percent of a program. The regulations have been revised to require that
if an institution adds an additional location that offers 100 percent
of a program, the institution is required to notify the Secretary in
accordance with 34 CFR 600.30. If the Secretary determines that the
addition of the location may impair an institution's administrative
capacity or financial strength, the Secretary may require the
institution to apply to the Secretary for a certification that the
institution continues to meet the standards for participation in the
Title IV, HEA programs.

Section 668.15 Factors of Financial Responsibility

In response to public comment, the Secretary has revised the cash
reserve requirement to provide that an institution will be deemed to
have sufficient cash reserves to make refunds if the institution
demonstrates that it meets the factors of financial responsibility in
Sec. 668.15 and demonstrates that it has paid refunds in a timely
manner over a two-year period. If the institution does not demonstrate
financial responsibility, the institution will have to post a letter of
credit in accordance with existing regulations. If the institution did
not demonstrate timely payment of refunds, the institution will have to
post a letter of credit equal to 25 percent of the Title IV refunds it
was required to make over the past year.
Based upon the change in requirements for the cash reserve related
to refund payments set out in 668.15, the Secretary has amended
Secs. 668.15(b)(7)(i)(A) and (8)(i)(B) to remove the reference to the
cash reserve fund in the delineation of items that would be included in
the list of institutional assets for the acid test analysis.
The Secretary has also amended the language in 668.15(b)(7)(i)(B)
to clarify that the determination of an institution's financial
responsibility depends, in part, upon an analysis of the relative size
of an institution's net operating losses over the prior two year
period. This clarification is being made to reflect the discussion on
59 FR 22382 of the April 29 final regulations, where the Secretary
explained that an analysis of an institution's operating losses was
made to determine if the losses in either or both of the institution's
two most recently completed fiscal years in sum total more than ten
percent of the institution's total net worth at the beginning of the
first year in the two year period.
The Secretary has amended Sec. 668.16(d) to delineate items that
the Secretary will consider in determining whether a State tuition
recovery fund is an acceptable substitute for the federal cash reserve
requirement.

Section 668.16 Standards of Administrative Capability

In response to public comment, the Secretary has modified the
provisions governing satisfactory academic progress in Sec. 668.16(e)
to provide clarification.
In response to public comment, the Secretary has revised
Sec. 668.16(l) that required that, to be administratively capable, an
institution was required to meet the 33 percent withdrawal rate
specified in the regulations. This provision is now applicable only to
institutions that seek to participate in a Title IV, HEA program for
the first time (``new'' schools). The Secretary has also changed the
withdrawal date provision to require institutions to report their
withdrawal rates for an award year time period, rather than an academic
year time period.

Section 668.22 Institutional Refunds and Repayments

Section 668.22(a)(1) has been amended to clarify that the
requirement that an institution have a fair and equitable refund policy
under which the institution makes a refund of certain charges to a
student who received Title IV, HEA program assistance, includes any
student whose parent received a Federal Direct PLUS loan on behalf of
the student. In addition, Sec. 668.22(i) has been amended to clarify
that ``financial aid'' includes Federal Direct PLUS loans received on
the student's behalf.
In response to public comment, changes have been made to remove
language that would have required an institution to treat a student on
a leave of absence as a withdrawal for purposes of this section.
Language has been removed from Secs. 668.22(a)(1)(ii), (e)(1)(i), and
(g)(2)(iv) of the April 29, 1994 final regulations to reflect this
change. Section 668.22(j)(1)(ii) has been amended to define the
withdrawal date for a student who does not return to the institution at
the expiration of an approved leave of absence or takes a leave of
absence that is not approved, as the student's last recorded date of
class attendance as documented by the institution. Section 668.22(j)(2)
has been added to specify that a leave of absence is approved for
purposes of this section if no other leave of absence has been granted
within a twelve-month period, the leave of absence does not exceed 60
days, the student makes a written request to be granted the leave of
absence, and the leave of absence does not involve additional charges
by the institution to the student. Section 668.22(j)(4)(iii)(A) has
been amended to require that an institution pay a refund that is due to
a student who does not return to the institution at the expiration of
an approved leave of absence, within 30 days of the date of expiration
of the leave of absence. Section 668.22(j)(4)(iii)(B) has been added to
require that an institution pay a refund that is due to a student who
is taking an unapproved leave of absence, within 30 days after the
student's last recorded date of class attendance as documented by the
institution.
In response to public comment, Sec. 668.22(b)(1)(iv)(A) has been
amended to reflect that the Secretary has removed Appendix A to this
part, Standards for Acceptable Refund Policies by Participating
Institutions, and replaced it with the Federal refund calculation
described in new Sec. 668.22(d).
Sections 668.22(c)(2)(ii) and 668.22(g)(2)(ii)(B) permit an
institution to exclude allowable late disbursements of loans made under
the Federal Direct Student Loan Program from a student's scheduled cash
payment. These sections have been amended to clarify that late
disbursements of loans made under the Federal Direct Student Loan
Program must be made in accordance with 34 CFR 685.303(d) of the
Federal Direct Student Loan Program regulations.
In response to public comment, Sec. 668.22(e)(i) has been amended
to define the minimum ``period of enrollment for which the student has
been charged'' as the semester, trimester, quarter, or other academic
term in the case of an educational program that is measured in credit
hours or clock hours and uses semesters, trimesters, quarters, or other
academic terms. Section 668.22(e)(ii) has been amended to define the
minimum ``period of enrollment for which the student has been charged''
in the case of an educational program that is measured in credit hours
or clock hours and does not use terms and is longer than or equal to
the academic year in length, as the greater of the payment period or
one-half of the academic year. Section 668.22(e)(ii) is also amended to
define the minimum ``period of enrollment for which the student has
been charged'' in the case of an educational program that is measured
in credit hours or clock hours and does not use terms and is shorter
than the academic year in length, as the length of the educational
program.
Section 668.22(f)(1)(ii), (f)(2)(i), (g)(3)(ii), (h)(1), (h)(2)(ii)
and (h)(2)(v) have been amended to clarify that, for purposes of this
section an institution is not required to determine whether a student
has received an overpayment and, therefore, is not required to return
any amount of a repayment, for noninstitutional costs for Federal
Direct Stafford, or Federal Direct PLUS program funds. This is
consistent with requirements for Federal Work Study (FWS), Federal
Stafford loan, Federal PLUS, and Federal SLS program funds.
In response to public comment, Sec. 668.22(g)(3)(iii)(B) has been
added to provide that an institution does not have to pay a refund if
the institution demonstrates that the amount of a refund would be $25
or less, provided that the institution has obtained written
authorization from the student in the enrollment agreement to retain
any amount of the refund that would be allocated to the Title IV, HEA
loan programs.
Consistent with the allocation order for the return of unsubsidized
and subsidized Federal Stafford loans, Sec. 668.22(h)(1)(v) has been
added and Sec. 668.22(h)(1)(vi) has been amended to clarify that an
institution must allocate a refund to eliminate outstanding balances on
unsubsidized Federal Direct Stafford loans received by the student
before allocating any portion of the refund to eliminate outstanding
balances on subsidized Federal Direct Stafford loans received by the
student.
Section 668.22(j)(3) has been amended to clarify that this
paragraph specifies the timely determination of withdrawal for students
who drop out of an institution. It is unnecessary to specify the timely
determination of a student's withdrawal in the case of students who
officially withdraw, are expelled, or take an unapproved leave of
absence, because the institution has either been informed of the
withdrawal, or has taken action to withdraw the student. Further, the
Secretary would expect an institution to be aware that a student has
failed to return from an approved leave of absence on the day that the
student is scheduled to return to the institution.
In order to provide further guidance on the refund process, the
Secretary has included flow charts that demonstrate the basic
procedures for determining which refund policy to use and general
guidance on how to calculate refunds. These flow charts are located in
a new Appendix A to this part (Flow Charts for Procedures for
Calculating Refunds Under Sec. 668.22).

Section 668.23 Audits, Records, and Examinations

References to a foreign institution have been removed from this
section to clarify that an institution, as that term is used throughout
the regulations, includes a foreign institution, as defined in 34 CFR
600.52, unless otherwise specified.
In response to public comment, Sec. 668.23(c)(1)(i) and (iii) have
been amended to specify that a third-party servicer's annual compliance
audit must meet the compliance audit standards for institutions. This
change reflects the Secretary's determination that a third-party
servicer, as an agent of an institution, must be examined with the same
standards that are applied to institutions.
The Secretary is making a technical change to Sec. 668.23(c)(1)(iv)
and (d) to specify that the U.S. General Accounting Office's
publication concerning general standards and standards for compliance
audits is now published under the title: Government Auditing Standards.
In response to public comment, a foreign institution's first audit
report is only required to cover the two most recently concluded award
years in which the foreign institution participated in the Title IV,
HEA programs, unless otherwise specified by the Secretary. If a foreign
institution has been participating in the Title IV, HEA programs for
less than two award years, the foreign institution's first audit report
must cover the entire period of time since the foreign institution
began to participate in the Title IV, HEA programs. This change to the
final regulations that were published on April 29, 1994, reduces the
burden that is placed upon a foreign institution that has been
participating in the Title IV, HEA programs for a long time. A new
Sec. 668.23(c)(2)(i)(B) incorporates this change.
In response to public comment, Sec. 668.23(c)(3) has been revised
to require that an institution's or third-party servicer's annual
compliance audit must be based upon the award year and submitted to the
Department of Education within six months after the end of the
institution's or third-party servicer's fiscal year that ends on or
after the most recently concluded award year for which the audit is
performed. A corresponding change has also been made to new
Sec. 668.23(c)(2)(i)(B) and to Sec. 668.23(c)(2)(ii).
In response to public comment, Sec. 668.23(h)(1)(v), which required
an institution to document a Title IV, HEA program recipient's
placement in a job, if the institution had a placement service and the
student used that service, has been removed. In addition,
Sec. 668.23(h)(2) (i) and (ii), which require an institution to
establish and maintain records regarding the admission requirements and
educational qualifications of each regular student the institution
admits into an eligible program, have been combined under
Sec. 668.23(h)(2) to simplify the regulations.

Subpart G--Fine, Limitation, Suspension and Termination Proceedings

Section 668.81 Scope and Special Definitions

Under the State Postsecondary Review Program (SPRP) authorized
under Part H-1 of Title IV of the HEA, a State Postsecondary Review
Entity (SPRE) reviews institutions referred to a State to determine if
the referred institutions meet applicable State standards. If a SPRE
determines, after affording an institution the opportunity to contest
that determination, that an institution should no longer participate in
the Title IV, HEA programs because it violates state standards, it
notifies the Secretary of that determination. Under 34 CFR 667.26(b)(2)
of SPRP regulations, the institution is not allowed to appeal that
termination determination to the Secretary.
Upon receipt of that notice, the Secretary immediately terminates
the institution's participation in the Title IV, HEA programs.
Accordingly, Sec. 668.81 is amended to clarify that Subpart G of Part
668 does not apply to terminations under the SPRP.

Subpart H--Appeal Procedures for Audit Determinations and Program
Review Determinations

Section 668.116 Hearing

The Secretary has also made a typographical correction to
668.116(e)(1)(vi) to reflect that institutions and third party
servicers have up to 30 days following the filing of a request for
review of an audit determination or a program review determination to
file certain other records and materials to be considered in
conjunction with their request. The April 29, 1994 final regulations
contained a typographical error that defined this period as ``3'' days
rather than the ``30'' days established for such documentary
submissions.

PART 682--FEDERAL FAMILY EDUCATION LOAN PROGRAMS

Subpart D--Guaranty Agency Programs

Section 682.413 Remedial Actions

The April 29, 1994 regulations applied the remedial actions of this
section to a third-party servicer that contracts with a lender or
guaranty agency to administer any aspect of the lender's or agency's
FFEL programs. However, the final regulations did not specify that a
third-party servicer was entitled to an opportunity to be heard prior
to the assessment of any remedial actions that the Secretary deems are
appropriate to the alleged violation. Accordingly, Sec. 682.413(e)(1)
is amended to provide third-party servicers that contract with lenders
or guaranty agencies with an opportunity to present evidence or other
information as to why the remedial action should not be levied against
the servicer. This change provides due process protection for third-
party servicers that contract with lenders or guaranty agencies.
Analysis of Comments and Changes
In response to the Secretary's invitation in the April 29, 1994
final regulations, 706 parties submitted comments. An analysis of the
comments that have resulted in changes to the final regulations
follows.
Major issues are grouped according to subject, with appropriate
sections of the regulations referenced in parenthesis. Other
substantive issues are discussed under the section of the regulations
to which they pertain. Technical and other minor changes and suggested
changes the Secretary is not legally authorized to make under the
applicable statutory authority are not addressed (unless the Secretary
believes it is necessary to do so.)

PART 668--STUDENT ASSISTANCE GENERAL PROVISIONS

Subpart A--General

Section 668.2 General definitions

Academic Year
Comments: Eighty-seven commenters commented on the Secretary's
definition of a week of instructional time for purposes of the
definition of an academic year and a week of instruction for purposes
of the definition of an eligible program in Sec. 668.8. A few
commenters asked for clarification on the implementation of the five-
day rule. One commenter suggested that the Secretary clarify the
definition of a week of instruction, because a strict reading of the
language implies that an institution would not be able to count as a
week of instruction any week in which there was not a full five days of
instruction due to a holiday, teacher workshop day, etc. Some
commenters were concerned that this provision would require their
students to make-up time for Federal holidays. One commenter observed
that given that there are approximately 12 Federal holidays per year,
even a nine-month program which meets five days per week would not be
deemed to have 30 weeks of instruction under the current definition of
an academic year. One commenter expressed concern that its institution
would have to eliminate a monthly inservice, during which meetings,
tutoring sessions, and professional lectures are conducted. Another
commenter stated that the State of Maryland would not permit them to
reduce the number of hours per day in order to add a fifth day of
class. The institution was concerned that under this provision, its
students who attend their weekend program would be ineligible for Title
IV, HEA program assistance. Another commenter requested that the
Secretary define a day of instruction, examination, or preparation.
Many commenters were concerned that requiring students to attend
classes at least five days per week if the students are attending
educational programs measured in credit hours without semesters,
trimesters, or quarters, would create time and economic hardships. The
commenters said the schedules of these programs are tailored to meet
the needs of non-traditional students who have family and work
obligations which require flexible school schedules. Many commenters
believed that under this provision, students would encounter decreased
wages and increased child care costs if they were required to spend
extra days in class. Some commenters stated that this rule would only
contribute to student absenteeism. Other commenters argued that this
provision would work as a disincentive for some students to attend
these programs and would serve as an agent in cutting off equal access
to students who cannot attend classes five days a week. Some commenters
feared that this rule would have a substantially negative impact on
enrollment at their institutions. One commenter stated that he
specifically chose his program of study because it allowed flexibility
in attending classes and retaining his job, and this provision would
prohibit him and many other students from pursuing their education and
employment opportunities. Some commenters maintained that students who
travel to institutions for intensified weekend programs would be
severely impacted by this provision, as they would incur greater
transportation and lodging costs. Some commenters viewed the provision
as discriminatory, as it would limit educational access for some
students. One of the commenters observed that traditional education is
not effective in low-income, single-parent households. A few commenters
believed that the Secretary did not take into account the rationale for
the use of non-standard terms. These institutions offer more starts
with less students so that staff can better assist students with
placement upon completion of the program.
Some commenters remarked that while the current definition
addresses the required minimum of days per week, it disregards the
number of hours per day. Many commenters felt that the Secretary should
focus on the amount of daily instructional time rather than the number
of days per week spent in the classroom. The commenters questioned the
relationship between the number of days a student attends classes and
the quality of a program, especially if the regulation does not
recognize the length of time a student spends in class per day. One
commenter suggested that the Secretary define its 30-week academic year
as any period of at least 30 chronological weeks, i.e., 210 days, in
which at least 720 clock hours of instruction is scheduled to occur.
This methodology translates to requiring scheduled attendance of at
least 24 hours of attendance per week for a full-time student and is
consistent with the Department's long-standing definition of full-time
status. The commenter noted that given that non-fixed term institutions
frequently have weekly or bi-weekly starts which could make it
difficult for auditors to determine exactly where vacations and/or
other activities not related to class preparation might fall, this
proposal is more easily audited since the program reviewer or auditor
would simply need to look at the program curriculum to determine the
total number of classroom hours of instruction within the period. The
commenter maintained that this proposed change is consistent with the
Department's historical definition of full-time status, is easier to
audit, satisfies current clock-hour/credit-hour conversion
requirements, and is less administratively burdensome than the
definition in the final rule. One commenter believed the effective date
and the timeframe allowed for institutions to comply with this
regulation was too stringent. The commenter felt that institutions and
students should be given sufficient time to rearrange their schedules
based on the changes necessitated by this requirement.
Discussion: The Secretary would like to clarify the Department's
interpretation of the five-day rule under the regulations in effect for
the 1994-95 award year as it applies to programs which measure progress
in credit hours but do not use standard terms (semesters, trimesters,
or quarters). A proprietary institution of higher education or a
postsecondary vocational institution must, to be eligible, provide an
eligible program, as defined by Sec. 668.8(d) of the Student Assistance
General Provisions regulations. Section 668.8(d) provides for three
types of eligible programs for these institutions which require a
program to have a specified number of weeks of instruction (see
Sec. 668.8(d) (1), (2), and (3)). In addition, each participating
institution is subject to a definition of an academic year in which a
full-time student (with respect to an undergraduate course of study),
during a minimum of 30 weeks of instructional time, must complete a
specified amount of work.
For purposes of these definitions of an eligible program and an
academic year, for all educational programs measured in credit hours
without standard terms (semesters, trimesters, or quarters), a ``week
of instruction'' and a ``week of instructional time'' must include at
least five days of instruction, examinations, or preparation for
examinations within a consecutive seven-day period, as opposed to the
required one day of instruction, examinations, or preparation for
examinations per seven day period for all other programs.
The five-day rule in effect requires an institution to demonstrate
that certain programs and academic years for those programs have not
only a minimum number of weeks, but also a minimum number of days. For
example, in order for a program to meet the eligible program definition
that requires at least 600 clock hours, 16 semester or trimester hours
or 24 quarter hours of instruction, examinations, or preparation for
examinations offered during a minimum of 15 weeks, the program must
meet for a minimum of 15 weeks over which a minimum of 75 days of
instruction, examinations, or preparation for examinations occur (five
days of instruction, examinations, or preparation for examinations for
15 weeks).
An institution that wants to set its program to be only 15 weeks
long would therefore have to meet an average of five days per week for
the 15 week period in order for the program to be eligible. An
institution with a program that meets less frequently than five days a
week would have to meet enough weeks to provide 75 days of instruction,
examinations, or preparation for examinations. For example, a program
meeting three times a week would have to be 25 weeks long in order to
be eligible under this provision.
This same approach is used to determine an institution's academic
year. An institution that wants to set its academic year to be only 30
weeks long would have to meet an average of five days per week for the
30 week period. An institution with a program that meets less
frequently than five days a week would have to meet enough weeks to
provide 150 days of instruction, examinations, or preparation for
examinations (30 weeks x five days per week) in order to have a program
offered over a full academic year. For example, a program that meets
four times a week would have a full academic year of approximately 38
weeks (37 weeks x four days per week (plus an additional 2 days) = 150
days of instruction, examinations, or preparation for examinations). An
institution has the option of pro rating Title IV, HEA program aid
disbursements if it chooses to offer an eligible program over a period
of time less than an full academic year.
The Secretary believes that this interpretation addresses many of
the concerns of the commenters, as it does not require an institution
to restructure a program to schedule five days of classes per week or a
student to be in attendance five days per week. This interpretation
allows an institution to establish a class schedule that meets the
needs of its student population, while ensuring that the student is
provided with a sufficient amount of education. The Secretary does not
specify what constitutes a day of instruction, examination, or
preparation for examination. However, the Secretary would expect an
institution to be able to demonstrate that the amount of instruction,
examinations, or preparation for examinations offered or required is
reasonable and necessary for completion of the program.
The Secretary agrees with the commenters who noted that it would be
more appropriate for the current definitions of a week of instructional
time and a week of instruction to take into account the hours of
education offered to students each week, rather than the days of
education offered each week. In particular, the Secretary agrees with
the commenter who suggested that the Secretary define an academic year
in a manner that relates to the amount of work that a full-time student
is expected to perform over this period. To this end, the Secretary has
decided to modify the definition of an academic year and an eligible
program beginning with the 1995-96 award year to require that, for
educational programs using credit hours, but not using a semester,
trimester, or quarter system, a week of instructional time (and a week
of instruction) is any week in which at least 12 hours of regularly
scheduled instruction, examinations, or preparation for examinations
occurs. The Secretary believes that a minimum number of hours, as
opposed to a minimum number of days per week, will permit even greater
flexibility to institutions that seek to provide education to
nontraditional students. The Secretary believes that 12 hours per week
is a reasonable measure, since full-time students are expected to carry
a minimum of 12 semester or quarter hours per academic term in an
educational program using a semester, trimester, or quarter system.
Thus, full-time students enrolled in such programs are generally
assumed to be in class attendance at least 12 hours per week, and this
hourly requirement has been adopted to replace the five day rule to
measure program eligibility. This provision is to be implemented in the
same manner as the five-day rule provision. For example, in order for a
program to meet the eligible program definition that requires at least
600 clock hours, 16 semester or trimester hours or 24 quarter hours of
instruction, examinations, or preparation for examinations offered
during a minimum of 15 weeks, the program must meet for a minimum of 15
weeks over which a minimum of 180 hours of instruction, examinations,
or preparation for examinations occur (12 hours of instruction,
examinations, or preparation for examinations per week for 15 weeks).
An institution that wants to set its program to be only 15 weeks long
would therefore have to meet an average of 12 hours per week for the 15
week period in order for the program to be eligible. An institution
with a program that meets less frequently than 12 hours per week would
have to meet enough weeks to provide 180 hours of instruction,
examinations, or preparation for examinations. For example, a program
meeting 6 hours per week would have to be 30 weeks long in order to be
eligible under this provision.
Because neither the current five-day rule nor the 12-hour per week
provision requires an institution to offer instruction, examinations,
or preparation for examinations on specific days, an institution may
not include a holiday for these calculations unless regularly scheduled
instruction, examinations, or preparation for examinations occurs on
that day.
Because the interpretation detailed above does not require an
institution to restructure a program to meet 5 days per week, the
Secretary does not agree that it was necessary to delay implementation
of this requirement.
Changes: The definition of an academic year has been amended to
require that, for educational programs using credit hours, but not
using a semester, trimester, or quarter system, a week of instructional
time is any week in which at least 12 hours of regularly scheduled
instruction, examinations, or preparation for examinations occurs. A
corresponding change has been made to the definition of an eligible
program in Sec. 668.8(b)(3)(ii).
Comments: One commenter observed that many external degree and
adult learning programs are trying to reduce the number of days spent
in the classroom. One commenter requested that the Secretary utilize
the diversity and plurality of the education system by recognizing the
amount of time the student spends in different educational settings.
One commenter remarked that although instruction does not include
periods of orientation or counseling, that is the time when some
schools perform their required entrance loan counseling.
Discussion: The Secretary agrees that internships, cooperative
education programs, independent study, and other forms of regularly
scheduled instruction can be considered as part of an institution's
academic year. Orientation programs and counseling do not provide
educational instruction related to class preparation or examination and
must not be included in determining the length of an academic year.
Changes: None.
Comments: Some commenters were confused as to the specific abuses
that the Secretary is attempting to curb with the five-day rule. A few
commenters disagreed with the Secretary's rationale that credit hour
non-term programs are more susceptible to abuse than a traditional
academic program. Many of the commenters believed that the 30-week
academic year and the clock-hour/credit-hour conversion provisions have
adequately dealt with this situation. One commenter requests that the
Secretary demonstrate how it is possible to abuse the current
definition and still meet the requirements for clock-to-credit-hour
conversions. Several commenters believed that this provision is
unnecessary, as the abuses that the Secretary is trying to curb with
this rule are already addressed by other existing provisions (for
example: certification gatekeeping functions contained in the HEA;
State requirements which specify hours of instruction or academic
calendars which consider class attendance on a daily or weekly basis;
accrediting agencies which are required to look at the relationship
between tuition and program length as it relates specifically to
vocational training; and the SPRE standards). The commenters feel that
the public would be better served by relying on existing regulations
relating to program length, rather than requiring five days of
instruction per week. A few commenters did not understand why its
program met the program contact hours requirements of its accrediting
agency, yet did not comply with the Department's regulations. One
commenter requested clarification of the Secretary's policy of
requiring accreditation of an institution for oversight, but not
accepting verification by these accrediting agencies that an
institution's programs are educationally sound.
Some of the commenters noted that this provision was not addressed
in the February 28, 1994 notice of proposed rulemaking or during
negotiated rulemaking and there was no opportunity to comment on this
provision until publication of the final rule. Some commenters argued
that the Department is exceeding its statutory authority, as Congress
did not define this provision during reauthorization. One of these
commenters believed there was no indication in the proposed rule that
non-standard term programs would be singled out for discriminatory
treatment in the definition of an academic year. The commenter
understood that although the Secretary indicated he was concerned about
assuring no opportunities for abuse by these programs, he made that
statement in the context of the possible need to establish a standard
workload for a full-time student; not in the context of making changes
to the definition of an academic year and an eligible program. Many of
the commenters believed that this provision is prejudicial against
credit hour institutions without terms, and suggested that the
Secretary apply the same definition of a week of instruction to all
institutions. One commenter was concerned that the regulation treats
programs that have a term, but a term that is not a semester, trimester
or quarter, the same as ``nonterm'' programs. Another commenter felt
that the interests of the four-year institutions were better
represented than the nonterm institutions which would be more impacted
by this provision. One commenter noted that the Secretary has made an
exception for programs that lead to associate, bachelor, or
professional degrees, but not for nondegree programs.
Discussion: As stated in the February 28, 1994 NPRM and the April
29, 1994 final regulations, the Secretary is correcting an abuse of the
definition of an academic year whereby an institution that has programs
that are measured in credit hours without standard terms could claim
that it meets the requirements for the minimum amount of work to be
performed by a full-time student over an academic year by giving a
full-time student a minimal amount of instruction over a 30-week (or
more) period, which the institution claims to be equivalent to 24
semester or 36 quarter hours. The Secretary believes that provisions
that address this area of abuse are appropriate in the regulations to
prevent institutions from establishing elongated instructional
schedules that do not require an appropriate workload throughout that
period for a full-time student. Institutions offering credit hour
programs without standard terms have more flexibility in shifting the
workload requirements for their programs over an indefinite period than
do clock hour programs or credit hour standard term programs. The
Secretary believes that it is appropriate to establish minimum
instructional periods that must be used for students attending these
institutions. No corresponding changes need to be made where students
are already required to receive a minimum amount of clock hours of
training per week to be full-time students, or where the institution
has fixed standard terms.
It is the Secretary's responsibility, and not an institution's
accrediting agency, to utilize the definitions of an academic year and
an eligible program in the HEA to ensure that appropriate amounts of
Title IV, HEA program funds are disbursed to students. The Secretary
does not believe that other provisions of the HEA or of the regulations
address the specific area of abuse that this provision addresses.
Although the clock-hour/credit-hour provision provides some protection
against course structuring where an insufficient quantity of
instruction is offered to support the academic credits assigned to the
program, it does not prevent an institution from stretching the length
of an educational program to conform to the minimum number of weeks
required without offering an appropriate quantity of instruction during
each of those weeks. Further, the Secretary notes that there are
programs that must meet the statutory minimum number of weeks under the
academic year and eligible program definitions that are not subject to
the clock-hour/credit-hour regulations. For example, a training program
in which each course is fully acceptable toward the institution's
associate degree would be exempt from the clock-hour/credit-hour
provision.
The Secretary notes that the February 28, 1994 NPRM requested
comment on whether a minimum full-time workload for students enrolled
in these educational programs should be established to address this
abuse. Several commenters agreed that this abuse should be addressed.
Rather than changing the proposed definition of full-time student to
require measurement of student workloads, the Secretary believes it is
more beneficial to stem abuse in this area by modifying the definitions
of an academic year and an eligible program to require a minimum amount
of instruction per week for institutions that offer credit hour
programs without terms.
The Secretary notes that the statute defines an academic year in
terms of weeks of instructional time and certain eligible programs in
terms of weeks. The statute does not apply these terms to the
definitions of eligible programs that qualify an institution as an
institution of higher education for purposes of the Title IV, HEA
programs. For the reasons stated above, the Secretary believes it is
necessary to define these terms in a manner that will protect Title IV,
HEA program funds.
Changes: None.
Third-Party Servicer
Comments: Five commenters suggested, for the purposes of 34 CFR
part 668, that the definition of third-party servicer in this section
should only identify those functions relating to third-party servicers
that contract with institutions (as opposed to those third-party
servicers that contract with lenders and guaranty agencies) to provide
third-party servicers and institutions a clear understanding of which
provisions are applicable. The five commenters also suggested that the
definition of third-party servicer should be limited to those
activities that an institution is required to perform under its
participation agreement with the Secretary. These commenters believed
that such a limitation would result in services such as consulting,
training, computer services, ability to benefit test publishers, and
legal advice not being covered by these regulations. The five
commenters recommended clarifying that administration of participation
is limited to what is specified in the institution's participation
agreement with the Secretary.
Discussion: The Secretary does not believe that additional
clarification of the definition of third-party servicer is necessary in
the form recommended by the commenters. Section 481(f) of the HEA
specifies that a third-party servicer is an individual, State, or
private, profit or nonprofit organization that enters into a contract
with an eligible institution to administer, through either manual or
automated processing, any aspect of the institution's participation in
any Title IV, HEA program. A third-party servicer that contracts with
an eligible institution to administer any aspect of the institution's
participation in the Title IV, HEA programs is required to follow the
provisions in 34 CFR part 668 that are applicable to third-party
servicers. Under the program participation agreement that an
institution signs to participate in the Title IV, HEA programs, the
institution specifically agrees to abide by all rules and regulations
pertaining to Title IV of the HEA. Therefore, the suggestion to limit
the scope of the definition of third-party servicer to what is required
under a program participation agreement would not narrow the scope of
the definition of third-party servicer, and could result in confusion
over the definition of third-party servicer.
Changes: None.
Comments: Five commenters contended that the function of processing
student financial aid applications was ambiguous and needed further
clarification or else should be removed. The commenters argued that the
Free Application for Federal Student Aid (FAFSA) is sent to the central
processor or Multiple Data Entry Processor (MDE) and the function
therefore should not be covered by the regulations. In addition, the
commenters recommended that if the Secretary kept the language, that
processing student financial aid applications should be clarified to
exclude non-Federal financial aid applications.
Five commenters recommended that the function of determining
student eligibility and related activities should not include ``related
activities.'' The commenters argued that related activities was too
ambiguous a term and was highly subjective.
Five commenters recommended clarifying the function of certifying
loan applications to not include guaranty agency or lender electronic
processing of loan applications because, the commenters contended,
these entities merely use data provided by an institution.
Five commenters were concerned that escrow agents, as that term is
used pursuant to 34 CFR 682.408, would be considered to be third-party
servicers under the definition of third-party servicer in 34 CFR part
668. The commenters recommended that the Secretary specifically exclude
the function that escrow agents perform from the list of functions that
the Secretary does not consider administration of the Title IV, HEA
programs because, the commenters contended, an escrow agent disburses
funds for a lender under the FFEL programs and not for an institution.
In addition, the commenters argued that the function of receiving,
disbursing, or delivering Title IV, HEA program funds should include
clarification that disbursements of funds are those received by the
institution from the Secretary or lender.
One commenter argued that the definition of a third-party servicer
should include an attorney that is carrying out litigation activities
on Title IV, HEA program loans. Two commenters recommended that a
dollar threshold be established so as not to preclude services by local
attorneys on a small number of accounts. Three commenters argued that
attorneys should be excluded from the definition of a third-party
servicer. The commenters pointed out that if attorneys are covered by
these regulations that conflicts may arise between these regulations
and other Federal and State rules and regulations governing the conduct
of attorneys.
Five commenters recommended excluding data exchange functions from
the list of functions that the Secretary does not consider
administration of the Title IV, HEA programs. The commenters believed,
for example, that the Student Loan Clearinghouse, which the commenters
stated received and consolidated student enrollment data, should not be
considered a third-party servicer because the company merely
consolidates data for institutions, lenders, and guaranty agencies.
Eight commenters supported the Secretary's decision to not include
computer services and software providers from the list of functions
that the Secretary considers to constitute administration of the Title
IV, HEA programs. Six of the commenters requested that the Secretary
specifically exclude these services in the regulations. One commenter
believed that the function of providing industry-specific software or
service packages should be included in the list of functions that the
Secretary considers to constitute administration of participation in
the Title IV, HEA programs because flaws in these programs could result
in huge liabilities for institutions using the software. However, the
commenter also believed that computer software packages that are
modifiable by the user should not be covered by the regulations.
One commenter recommended that alternate Electronic Data Exchange
(EDE) destination points that serve only as an electronic conduit from
the Central Processing System to an institution should be excluded from
the definition of third-party servicer because this type of activity is
not a function of administering an institution's participation in the
Title IV, HEA programs.
Discussion: The Secretary does not agree with those commenters who
recommended removing the function of processing financial aid
applications. The Secretary believes that processing financial aid
applications is of fundamental importance to the proper delivery of
program funds authorized under Title IV of the HEA, and third-party
servicers contracting to perform this type of administration of the
Title IV, HEA programs must be held accountable for any violations
caused by the servicer. The Secretary also believes that the definition
of third-party servicer is sufficiently clear as applying only to the
function of processing financial aid applications required by the
Federal government for determinations by an institution of student
eligibility under the Title IV, HEA programs.
The Secretary does not agree with those commenters that recommended
modifying the function of determining student eligibility and related
activities to exclude ``related activities.'' The statute defines the
functions of a third-party servicer as administration of any aspect of
an institution's participation in any Title IV, HEA program. Since
there was no contention among commenters that determining student
eligibility was not a third-party servicer function and because the
statutory definition of third-party servicer is sufficiently broad, the
Secretary believes that the inclusion of ``related activities,'' such
as reviewing documents submitted as a result of student verification,
assists public understanding that a related function of determining
student eligibility is a third-party servicer activity and avoids the
possibility of third-party servicers attempting to avoid the
requirements of these regulations.
The Secretary agrees with commenters that the function of
certifying loan applications by an institution or its third-party
servicer should not include guaranty agency or lender electronic
processing of loan applications. However, the Secretary does not
believe that a change to the regulatory language is warranted because
guaranty agency and lender involvement in the certification of loan
applications under the FFEL programs is a routine practice of these
entities and is monitored under the FFEL programs. The Secretary does
not consider a guaranty agency or lender that electronically processes
loan applications for the FFEL programs and performs its assigned role
in the programs that the guaranty agency or lender participates in to
be considered a third-party servicer of an institution under these
regulations.
The Secretary does not agree with commenters that the function of
an escrow agent, as that term is used pursuant to 34 CFR 682.408,
should be added to the list of functions that the Secretary does not
consider to be an administration of an institution's participation in
the Title IV, HEA programs. Nor does the Secretary believe that the
function of receiving, disbursing, or delivering Title IV, HEA program
funds should be clarified to only include disbursements of funds that
are received by the institution from the Secretary or lender. The
Secretary believes that commenters have inadvertently misread the
definition of third-party servicer under 34 CFR part 668 as including
the functions of an escrow agent under 34 CFR 682.408. Under the
definition of third-party servicer in 34 CFR part 668, a third-party
servicer is an individual or a State or private, profit or nonprofit
organization that enters into a contract with an eligible institution
to administer, through either manual or automated processing, any
aspect of the institution's participation in any Title IV, HEA program.
Because an escrow agent under 34 CFR 682.408 contracts with an eligible
lender or guaranty agency to administer aspects of the lender's or
guaranty agency's FFEL programs and does not contract with an eligible
institution, an escrow agent is a third-party servicer of a lender or
guaranty agency and not of an institution and is considered to be a
third-party servicer under the definition of third-party servicer in 34
CFR part 682.
The Secretary generally agrees with those commenters who believed
that attorneys should not be covered by the definition of a third-party
servicer under these regulations. However, as noted in the discussion
of comments in the final regulations published in the Federal Register
on April 29, 1994, the Secretary, in promulgating the definition of
third-party servicer, applied the definition to a list of functions
relating to the administration of the Title IV, HEA programs, and
therefore is not regulating or excluding distinct entities by their
identity but rather the activities that individuals or organizations
perform in contracting with institutions. Provision of legal advice or
litigation activities are not included in these functions. However, it
is possible that an attorney would be considered to be a third-party
servicer under these regulations if the activity of the attorney,
performed on behalf of an institution, constitutes administration of
the Title IV, HEA programs. It is not appropriate to state that
attorneys are never considered third-party servicers as that would
permit services to escape oversight simply by being provided under
attorney signatures or by non-attorneys working for attorneys or their
law firms.
With respect to those commenters who recommended establishing a
dollar threshold to exclude local attorneys providing services on a
small number of accounts, the Secretary does not believe that such a
limitation is justifiable in the face of the statutory definition of
third-party servicer. The statute does not permit the Secretary to
promulgate a monetary threshold for administration of Title IV, HEA
program funds to determine whether or not an individual or organization
is a third-party servicer administering those funds.
The Secretary disagrees with those commenters who recommended
specifically excluding data exchange functions under the list of
activities that the Secretary does not consider administration of the
Title IV, HEA programs. The Secretary believes that data exchange is an
overly broad term that encompasses a wide variety of services such as
processing raw student eligibility data, determining completion rates,
or transmission of prepared data. With such an encompassing reach, the
Secretary cannot support excluding all data exchange from the oversight
of third-party servicers by the Secretary that is afforded by these
regulations.
The Secretary agrees with those commenters who supported the
Secretary's decision to exclude computer software or service providers
from the list of activities that the Secretary considers to constitute
administration of an institution's participation in the Title IV, HEA
programs. As explained in the discussion of comments in the final
regulations that were published in the Federal Register on April 29,
1994, the Secretary believes that the function of providing computer
software or services is simply a technological means to assist in
carrying out certain administrative functions that are already included
in the definition of third-party servicer in 34 CFR part 668. The
Secretary also agrees with the commenters who believed that the
function of providing computer software or services should be
specifically excluded from the definition of third-party servicer in
the list of functions that the Secretary does not consider to
constitute administration of an institution's participation in the
Title IV, HEA programs. Because the Secretary has already provided
explanation in the discussion of comments in the final regulations
published on April 29, 1994, in the Federal Register, the Secretary
believes that it is appropriate to provide that exclusion in the
regulations.
With respect to the commenter who recommended that alternate EDE
destination points be excluded from the definition of third-party
servicer in these regulations, the Secretary does not agree with the
comment. It is the experience of the Secretary that alternate EDE
destination points use the data that institutions provide to assist in
the administration of the institution's participation in the Title IV,
HEA programs. Alternate EDE destination points provide institutions
with assurances that the data relayed from the institution to the
alternate EDE destination point will be provided to the Central
Processor without error. Therefore, it is the position of the Secretary
that such a service should be under the oversight of these regulations
since relaying electronic information to the Central Processor is an
important function in the processing of Federal student financial
assistance claims.
Changes: A change has been made. The definition of third-party
servicer is amended to specifically exclude the function of providing
computer software or services from what the Secretary considers to
constitute the administration of an institution's participation in the
Title IV, HEA programs.
Comments: Two commenters believed that temporary employees employed
on-site at a campus under the complete supervision of an institution's
financial aid administrator (FAA) to assist in the administration of an
institution's participation in the Title IV, HEA program should not be
considered to be a third-party servicer. Two commenters believed that
``moonlighting'' FAAs who contract with other institutions to assist in
administering those institutions' participation in the Title IV, HEA
program should not be considered to fall within the scope of the
definition of third-party servicer. Another commenter recommended that
individuals taking on small consulting activities should not be subject
to the same stringent requirements as corporate consulting firms that
manage financial aid offices for several institutions. Three commenters
were concerned that employment contracts would fall within the scope of
the definition of a third-party servicer thereby making employees that
administer an institution's participation in the Title IV, HEA programs
third-party servicers.
Discussion: The Secretary agrees with those commenters that
believed that individuals employed on a temporary basis should not be
considered to be third-party servicers. The Secretary recognizes that
individuals who work full-time as financial aid administrators at one
institution often moonlight and provide valuable assistance at other
institutions during busy periods of the award year. The Secretary
believes that these individuals can appropriately be considered as
employees even if they are not paid as a regular salaried or hourly
employee of the institution.
With respect to employees hired pursuant to specific employment
contracts, the Secretary does not believe that such contracts trigger
the third-party servicer requirements. The Secretary never intended
that individuals employed by an institution in a capacity that involves
the administration of any aspect of an institution's participation in
the Title IV, HEA programs would be considered to be a third-party
servicer. The Secretary, is concerned however, that a third-party
servicer not be designated as an employee simply to avoid the
requirements of these regulations. The Secretary, therefore, considers
an individual engaged on a temporary basis to be an employee if the
person performs all required duties that are relevant to the
administration of the institution's participation in the Title IV, HEA
programs on site at the institution under the institution's
supervision, is paid directly by the institution, and is not employed
by or associated with a third-party servicer and is not engaged as a
third-party servicer at another institution. This language is not
intended to enable individuals who perform services for multiple
institutions during an award year to avoid being considered a third-
party servicer. The Secretary will in the future consider whether
further regulation is required if the employee designation is abused.
Changes: Changes have been made. The definition of third-party
servicer has been amended to clarify that employees of an institution
are not considered to be third-party servicers. An individual is
considered an employee of the institution if the individual works on a
full-time, part-time, or temporary basis at the institution; performs
all duties on site at the institution under the supervision of the
institution; is paid as an individual directly by the institution; is
not employed by or otherwise associated with a third-party servicer;
and is not a third-party servicer for any other institution.

Section 668.3 Reductions in the Length of an Academic Year.

Comments: Four commenters asked the Secretary to clarify that on-
going reductions, as opposed to transitional reductions, in the minimum
length of an academic year are permitted. One commenter questioned when
the two-year period began for transitional reductions in the minimum
length of an academic year. One commenter did not understand how an
institution could demonstrate that it has provided Title IV, HEA
program funds to its students based on the academic year requirements
in section 481(d) of the HEA since July 23, 1992, and also meet the
requirement that an institution must have an academic year that is less
than 30 weeks on the effective date of the regulations in order to
obtain a transitional reduction. One commenter urged the Department to
remove the requirement that an institution demonstrate that it has
provided Title IV, HEA program funds to its students based on the
academic year requirements in section 481(d) of the HEA since July 23,
1992. Another commenter did not believe that Congress or the Department
intended to force institutions to prove retroactively that they had a
30-week academic year prior to publication of the regulations. The
commenter noted that there was no way for an institution to ``make
amends'' if the institution was not previously in compliance.
One commenter was pleased that the Secretary had clarified
preliminary requirements for institutions requesting a reduction in the
minimum length of an academic year. The commenter further commended the
Secretary for providing that currently participating institutions may
be granted a temporary reduction for a period not to exceed two years,
if the institution demonstrates a commitment to change to a 30 week
academic year. The commenter felt that it would be beneficial for the
Secretary to provide examples of what ``unique conditions'' the
Secretary would look for when evaluating an institution's request for a
longterm reduction. One commenter felt that the Secretary should
provide guidance regarding the basis for a denial of a reduction
request. Specifically, the commenter questioned whether the Secretary
will abide by the decision of the accrediting agency that the academic
quality of the institution is satisfactory, or if and when he will
contravene such a determination.
Discussion: The Secretary would like to clarify that there are two
types of minimum academic year reductions for which an institution may
apply. The first type is a transitional waiver. An institution may ask
for a temporary reduction in the length of an academic year while the
institution changes to a 30 week academic year. This transitional
reduction may not exceed two years from the effective date of the April
29, 1994 final regulations (July 1, 1994). The second type is a
longterm waiver. An institution may apply for a longterm reduction in
the length of an academic year if it wishes to continue operating with
a reduced academic year on a longterm basis. The Secretary notes,
however, that Sec. 668.3(c)(2) states that an institution that is
granted a longterm waiver must reapply to the Secretary for a reduction
each time the institution is required to apply to continue to
participate in a Title IV, HEA program.
The Secretary notes that it is not inconsistent to require an
institution to demonstrate that it has provided Title IV, HEA program
funds to its students based on the academic year requirements in
section 481(d) of the HEA since July 23, 1992, and also meet the
requirement that an institution must have an academic year that is less
than 30 weeks on the effective date of the regulations. An institution
is permitted to have an academic year of less than 30 weeks, but may
not make full payment of Title IV, HEA program funds. However, unless
and until the institution is granted a reduction in accordance with
these regulations, the institution must pro rate the amount of Title
IV, HEA program assistance awarded to students in attendance based on
the definition of an academic year found in section 481(d) of the HEA.
The Secretary believes that it is appropriate to require that an
institution applying for a reduction in the length of an academic year
demonstrate that the institution has awarded, disbursed, and delivered
Title IV, HEA program funds in accordance with the academic year
requirements in section 481(d) of the HEA since July 23, 1992, as the
requirements became applicable to the various Title IV, HEA programs.
As the statute clearly states that an institution may not be granted a
reduction in the minimum length of academic year unless the institution
applies to the Secretary for a reduction, and the Secretary grants a
reduction, the Secretary expects that institutions with academic years
of less than 30 weeks that have not been granted a reduction have been
properly pro rating Title IV, HEA program assistance. The Secretary
believes institutions must have made a good faith effort to comply with
the requirements of the statute. The Secretary would like to clarify
that an institution that is ineligible for a reduction because the
institution did not properly award, disburse, or deliver Title IV, HEA
program funds in the past may be eligible for a reduction if the
institution makes arrangements that are satisfactory to the Secretary
to repay any overawards that resulted from the improper awarding,
disbursing, or delivering of Title IV, HEA program funds. The
Secretary's experience to date has been that this liability amount has
been insignificant.
In determining what constitutes ``unique circumstances'' that would
justify the Secretary granting a longterm reduction, the Secretary may
look at information such as whether an educational program has
historically provided instruction in a non-traditional manner for less
than 30 weeks in previous academic years and cost reduction to
students. Upon further consideration, the Secretary has decided that
program placement rates, completion rates or other educational outcomes
may also be evaluated as part of the Secretary's determination. Other
factors may qualify as unique circumstances that justify granting the
institution's request, depending upon the context in which these
factors are presented in a particular case.
The statute provides that a reduction may be granted by the
Secretary for good cause on a case-by-case basis. Therefore, the
Secretary, and not an institution's accrediting agency, is charged with
ensuring that reductions in the academic year are granted in a manner
that protects Title IV, HEA program funds. Although the Secretary
agrees that approval by an institution's nationally recognized
accrediting agency or State body that authorizes the institution to
provide postsecondary programs should be considered as a factor in
determining good cause for granting a reduction, the Secretary does not
believe that such approval on its own is sufficient reason for granting
an institution's request, as such an approval will most likely not
include all areas that the Secretary will look at to determine that a
reduction is warranted. Other factors that should be taken into account
include the number of hours of attendance and other coursework that a
full-time student is required to complete in the academic year, and any
unique circumstances that justify granting the institution's request.
Changes: Section 668.3(c) has been amended to clarify that an
institution may apply for a longterm reduction in the length of an
academic year if it wishes to continue operating with a reduced
academic year on a longterm basis. Section 668.3(d) has been added to
specify that an institution may demonstrate compliance with this
requirement by making arrangements that are satisfactory to the
Secretary to repay any overawards that resulted from the improper
awarding, disbursing, or delivering of Title IV, HEA program funds.

Section 668.8 Eligible Program

English as a Second Language
Comments: Many commenters requested the elimination of the
requirement that institutions test students at the conclusion of
English-as-a-Second-Language (ESL) programs to substantiate their
proficiency in English, and that schools only admit students who
``need'' such training. Commenters suggested that the Department lacks
the authority to require that institutions test program completers in
order to evaluate what they have learned or to dictate institutional
admissions policies. Furthermore, a number of commenters asserted that
they did not believe that the Department had grounds for limiting
student aid eligibility for individuals in ESL programs to Federal Pell
Grants only, as stipulated in the regulations.
Discussion: Upon further consideration, the Secretary agrees that
the assessment of whether an ESL program is providing adequate
instruction in English to allow a student to use already existing
knowledge, training, or skills should be left to an institution's
accrediting agency. Although findings from the Department of
Education's Inspector General have revealed more abuses in these
programs historically, the Secretary will defer regulating in this area
for now to provide the accrediting agencies an opportunity to address
this problem. The Secretary notes that an institution is still required
to document its determination that ESL instruction is necessary to
enable each student enrolled in its ESL program to use already existing
knowledge, training, or skills. The Secretary notes that section
401(c)(2) of the HEA limits the eligibility of these ESL programs to
the Federal Pell Grant Program. A student may receive other Title IV,
HEA program assistance for ESL coursework that is part of a larger
eligible program.
Changes: Section 668.8(j)(2) has been removed from the regulations.
Undergraduate Educational Program in Credit Hours
Comments: Five commenters requested that the Secretary put back
into the clock-hour/credit-hour conversion regulations the provision
that allows the Secretary to determine if a degree is an equivalent
degree and therefore exempt from the requirements of the clock-hour/
credit-hour conversion formula. Two of the commenters believed that
programs offered at institutions accredited by the Association of
Advanced Rabbinical and Talmudic Schools, which in some States lead to
the First Talmudic degree rather than a baccalaureate degree, is a
clear example of an equivalent degree and therefore should be exempted
from the clock-hour/credit-hour conversion requirements. Four
commenters suggested that the Secretary consider factors such as the
length of the program or acceptance as equivalent to the baccalaureate
degree for purposes of licensure by a State agency when determining if
a degree is in fact an equivalent degree.
Two commenters were concerned about the impact of the clock-hour/
credit-hour conversion regulations on hospital-based diploma nursing
programs that do not lead to a degree. The commenters believed that it
was unfair to reduce Federal financial assistance to students who were
enrolled at a hospital-based diploma school of nursing but were taking
a substantial number of credits at a local university or community
college. The two commenters requested that the Secretary allow programs
that offer equivalent credentials to be exempted from the clock-hour/
credit-hour conversion requirements.
One commenter requested that the Secretary allow an undergraduate
program offered over at least two years to be exempted from the clock-
hour/credit-hour conversion regulations if the program was equivalent
to an associate degree, as defined under paragraph (b) of this section.
Discussion: The Secretary agrees with those commenters who
requested that the Secretary reinsert the provision (previously removed
from the clock-hour/credit-hour conversion regulations in the April 29,
1994 final regulations) that an institution offering an undergraduate
educational program measured in credit hours and at least two academic
years in duration is exempt from applying the formula contained in
paragraph (l) to that program if the program provides an equivalent
degree as determined by the Secretary, or if each course within the
program is fully acceptable for credit toward that institution's
equivalent degree. Since publication of the final regulations on April
29, 1994, the Secretary has encountered at least one instance of a
degree that the Secretary considers to be an equivalent degree to a
baccalaureate degree. Given this additional information, the Secretary
believes that it is necessary to reinsert the ``equivalent degree as
determined by the Secretary'' language back into the clock-hour/credit-
hour conversion regulations so as not to penalize those institutions
that offer the equivalent degree.
With respect to those commenters who were concerned about the
impact of the clock-hour/credit-hour conversion regulations on
hospital-based diploma schools of nursing and who suggested inserting
``equivalent credential'' into the regulations to exclude these types
of programs, the Secretary believes that the issue has been resolved.
Pub. L. 103-382, which was signed by the President on October 20, 1994,
amends the HEA to specify that public or private nonprofit hospital-
based diploma schools of nursing programs are exempt from the clock-
hour/credit-hour conversion regulations as of July 1, 1994. The
Secretary has incorporated this statutory exemption into new
Sec. 668.9(b) (see discussion in the preamble for Sec. 668.9 under
significant changes to the final regulations). Because there is now a
statutory exemption for hospital-based diploma schools of nursing, the
Secretary sees no reason to provide a broad-based exclusion for non-
degree programs and therefore does not believe it to be appropriate to
exclude programs that lead to an equivalent credential.
The Secretary disagrees with the commenter who specifically
recommended excluding programs that are the ``equivalent of an
associate degree'' as defined under Sec. 668.8(b), from the
requirements of the clock-hour/credit-hour conversion regulations. The
Secretary believes that under the definition of the ``equivalent of an
associate degree,'' associate degree programs are already exempt from
the requirements of the clock-hour/credit-hour conversion regulations,
provided that the associate degree program is at least two academic
years of study. Furthermore, a two academic year program that is
acceptable for full credit towards a bachelor's degree is also exempted
from the clock-hour/credit-hour conversion requirements, provided that
the bachelor's degree program is offered at the same institution that
provides the two academic year program.
Changes: Changes have been made. The Secretary is amending
Sec. 668.8(k) (1) and (2) to exempt a program from the clock-hour/
credit-hour conversion requirements if the program is an equivalent
degree as determined by the Secretary or if each course within the
program is fully acceptable for credit toward the institution's
equivalent degree.
Comments: One commenter asked if there were any clock-hour/credit-
hour conversion requirements for programs offered in number of courses,
rather than in credit hours.
Discussion: Institutions that participate in the Title IV, HEA
programs must measure their programs in clock hours or in credit hours.
Changes: None.

Subpart B--Standards for Participation in the Title IV, HEA Programs

Section 668.12 Application procedures

Comments: There were a number of comments on this section. Many
commenters suggested that the requirement that an entire institution
must be recertified if the institution proposes to establish a branch
campus or an additional location that will offer 100 percent of an
educational program off site be deleted. Institutions expressed their
concern that this provision would act as a disincentive for
institutions to agree to offer programs at employer sites and would
therefore be at odds with the Administration's efforts to increase
education and training collaboration between institutions and
employers. Some commenters suggested that this provision be revised to
exclude programs offered by degree-granting institutions.
Discussion: The Secretary agrees that not all institutions that add
an additional location that offers 100 percent of a program need to be
required to be recertified. However, the Secretary has determined
through experience that the addition of a branch campus or other
location that offers a complete educational program can have a major
impact on the financial status of the whole institution and the ability
of the whole institution to administer the Title IV, HEA programs. For
many years, the Secretary has required institutions that seek to add a
location at which a complete educational program is offered to undergo
a certification review so that the Secretary could ascertain whether
the institution has the financial resources and sufficient
administrative capability to support another location.
Therefore, the Secretary has removed the requirement that an
institution must apply to the Secretary for a certification that the
institution continues to meet the standards for participation in the
Title IV, HEA programs if the institution adds an additional location
that offers 100 percent of a program. However, the Secretary requires
the institution to notify the Secretary of the addition of such a
location (as institutions that add an additional location that offers
at least 50 percent of an educational program are currently required to
do) if the institution wishes to have the location included in the
institution's participation in a Title IV, HEA program. The Secretary
puts institutions on notice that they may be required to file a
complete recertification application if the Secretary determines that
the addition of the location might impair an institution's
administrative capacity or financial strength.
Commenters that discussed employer-sponsored training programs
seemed not to understand that if institutions contract with employers
to provide training programs at the work-site or some other off-campus
location, that the employer is paying for the cost of training, and
that no Title IV, HEA program funds are involved, there is no need for
the institution to notify the Secretary.
Changes: Section 668.12 has been revised to no longer require an
institution to apply to the Secretary for a certification that the
institution continues to meet the standards for participation in the
Title IV, HEA programs if the institution adds an additional location
that offers 100 percent of a program. Section 668.12 has been further
revised to require that, if an institution adds an additional location
that offers 100 percent of a program, the institution is required to
notify the Secretary in accordance with 34 CFR 600.30. The current
regulations already provide that the institution may be required to
file a complete recertification application if the Secretary deems it
necessary.

Section 668.15 Factors of Financial Responsibility

General Standards of Financial Responsibility Cash Reserve
Comments: Many commenters believed that requiring an institution to
maintain a cash reserve fund equal to at least 25 percent of the total
dollar amount of refunds paid by the institution in the previous fiscal
year would not protect students or the Federal government if the
institution failed or went bankrupt. The commenters opined that in a
bankruptcy proceeding the disposition of any balance in the cash
reserve fund would fall under the jurisdiction of a Federal bankruptcy
court and therefore would not be available immediately to students or
to the government. Furthermore, some commenters indicated that because
an institution would have unrestricted access to cash reserve funds the
cash assets held in such funds are potentially at risk due to the
possibility of preferential transfer or fraudulent conveyance by an
owner in advance of a bankruptcy proceeding.
Many other commenters believed that the cash reserve fund
requirement was unnecessary in view of all the other requirements that
an institution must now satisfy to demonstrate that it is financially
responsible. The commenters contended that this requirement would place
an ``undue burden'' on an institution and could prevent the institution
from otherwise meeting other financial responsibility standards or even
cause the institution to become financially unstable. Moreover, based
on the new criteria for calculating a refund under the ``fair and
equitable'' refund provisions, the commenters were concerned that the
amount of the cash reserve could grow significantly in a short period
of time and would thus place an increasing and on-going financial
burden on the institution. Some of these commenters, and other
commenters, urged the Secretary to reduce the amount of the required
reserve from 25 percent to either 10 percent or an amount that would be
necessary for the institution to be able to make refunds for a 30-day
period. Another commenter suggested that the Secretary impose the cash
reserve requirement only on an institution that does not satisfy all
other financial responsibility standards; or, require that the
institution maintain, temporarily, a cash reserve fund until the
institution is able to provide, to the Secretary, an irrevocable letter
of credit.
Other commenters believed that the cash reserve requirement would
adversely affect an institution's ability to maintain its educational
standards because capital that would traditionally be available to the
institution for reinvestment in the institution or otherwise used to
support the institution's educational services and facilities would now
have to be wastefully set aside in a reserve fund. The commenters
suggested that the Secretary restructure the requirement to allow an
institution to mitigate or eliminate its cash reserve if the
institution could demonstrate set levels of reinvestment in its
business through capital acquisition. At a minimum, the commenters
urged the Secretary to allow an institution to provide a bond or letter
of credit in lieu of the cash reserve fund requirement.
One commenter believed that the separate fund provision of this
requirement would be particularly troublesome because it would impose
accounting, reporting, and management burdens that would not be
warranted for all institutions. The commenter recommended that the
Secretary provide an alternative method under which an institution
could prove that it met all the requirements of this section.
Specifically, the commenter suggested that the Secretary allow an
institution that issues debt in the public debt markets and achieves an
``investment grade'' credit rating on that debt issue with a nationally
recognized debt rating service to establish that it is financially
responsible in this manner.
Still other commenters believed that the Secretary was imposing an
unreasonable financial burden on an institution that participates in a
State tuition recovery program. The commenters noted that since the
Secretary has not approved any State tuition recovery funds, an
institution that would otherwise be exempt from the cash reserve
requirement would have to continue to contribute to the State's fund
and would, for identical reasons, be required to maintain for Federal
purposes a cash reserve fund. These commenters urged the Secretary to
grant relief to institutions by acting expeditiously to approve State
tuition recovery programs.
One commenter noted that the term ``refunds'', as used in this
section, could mean tuition refunds, institutional refunds, or any
disbursements made to students. The commenter suggested that the
Secretary clarify the meaning of the term so that an institution may
calculate correctly the amount of its required cash reserve.
A number of commenters contended that the requirement to maintain
the cash reserve fund in a bank account or in the form of short-term
securities was unnecessary and restrictive. One of these commenters
believed that the Secretary should exempt from the separate cash-
reserve fund requirement an institution that had sufficient
unrestricted funds to pay required refunds. Other commenters urged the
Secretary to allow an institution to maintain its cash reserve in a
money market fund or in other Federal government securities with
maturities of one year or less.
A few commenters believed that the establishment of a cash reserve
fund could be a problem for public institutions located in a State that
controls directly the receipt and disbursement of funds. The commenters
noted that those institutions may not have the authority under State
law to establish a cash reserve fund. Another commenter noted that many
public university systems operate under a pooled treasury concept.
Under that scheme, the three-month U.S. Treasury notes that could be
used to satisfy the cash reserve fund requirement would not be
earmarked to one campus. Consequently, the commenter recommended that
instead of requiring each campus to calculate the amount of a reserve
fund and maintain that fund, the Secretary should revise the
regulations to allow a public university system to (1) calculate the
amount of the reserve fund based on the total refunds of all system
campuses and, (2) maintain one consolidated reserve fund for all the
system's campuses.
Discussion: Under section 498(c)(6) of the HEA, the Secretary is
charged with establishing requirements to ensure that an institution
maintains sufficient cash reserves to pay required refunds. The
Secretary believes that an institution's ability to make required
refunds is enhanced by requiring the institution to reserve a portion
of the cash it receives from students in advance of providing
educational services. In this regard, the Secretary established the
cash-reserve-fund requirement on the premise that if an institution, at
the beginning of its fiscal year, reserved a reasonable amount of cash
of an amount based on a percentage of the institution's historical
refund experience, the institution would have sufficient cash reserves
to make refunds to students. However, the Secretary is convinced that
many points made by the commenters are valid, and that a performance-
based approach will better accomplish the statutory requirements and
the Secretary's objectives.
Under this performance-based approach, the Secretary would consider
an institution to have satisfied the statutory requirement, that the
institution maintained sufficient cash reserves to make required
refunds, if for two consecutive years (1) the institution demonstrates,
to the satisfaction of the Secretary, that it has made all required
refunds to students in a timely manner, and (2) that it has met or
exceeded all of the financial responsibility standards in
Sec. 668.15(b) in both of its last two consecutive fiscal years. An
institution that demonstrates that it satisfies these criteria provides
reasonable assurance to the Secretary that the institution will
continue to make required refunds in a timely manner. Moreover, the
Secretary believes that such an institution is not likely to close
precipitously because the institution will have demonstrated over a
period of time that it is financially responsible. Along the same
lines, the Secretary acknowledges that there is little, if any, risk
associated with an institution that has its liabilities backed by the
full faith and credit of a State, or by an equivalent governmental
entity, and therefore considers such an institution to have sufficient
cash reserves to make required refunds.
Conversely, the Secretary believes that the risk of precipitous
closure increases significantly for an institution that is unable, or
unwilling, to make required refunds in a timely manner, or that fails
to meet the financial responsibility standards. Therefore, upon a
finding by the Secretary, or an independent auditor engaged in the
performance of a financial or compliance audit, or a SPRE, or a State
licensing authority, that the institution failed to make required
refunds in a timely manner, or failed to satisfy the standards of
financial responsibility under Sec. 668.15(b) in either of the
institution's last two complete fiscal years, the Secretary shall
require the institution to submit to the Secretary an irrevocable
letter of credit equal to at least 25 percent of the total amount of
refunds the institution made, or should have made, during the
institution's last complete fiscal year. This irrevocable letter of
credit requirement may be satisfied in conjunction with any letter of
credit that may be required under Sec. 668.13(d)(1) or
Sec. 668.15(d)(2). The Secretary may, in his sole discretion, require
that two or more letters of credit be established separately with
common expiration dates or combined into a single letter of credit.
In establishing this performance-based requirement, the Secretary
considered carefully the points made by the commenters who noted that
the reserve-fund requirement would provide little, if any, protection
to students in the event that an institution went bankrupt, and the
commenters who argued that it was unnecessary or counter-productive to
require an institution that otherwise satisfies its financial and
fiduciary responsibilities to maintain a reserve fund. The Secretary
believes that by applying the letter of credit provision only to non-
performing institutions, this requirement provides the necessary
incentive for institutions to make, and to continue to make, refunds in
a timely manner, provides reasonable assurance that the Secretary will
be able to make refunds to students in the event that an institution
closes precipitously, and at the same time relieves the burden on
performing institutions.
The Secretary notes that since this requirement will not take
effect until July 1, 1995, an institution must continue to comply with
the current 25 percent cash-reserve requirement until that date.
Therefore, in response to public comment and further review, the
Secretary wishes to clarify the following issues. First, with respect
to calculating the amount of the cash reserve, the term ``refunds''
includes only refunds of title IV, HEA program funds. Second, an
institution may borrow cash from its reserve fund but only when this is
necessary for the institution to comply with the requirement that it
make timely refunds. If an institution uses the reserve fund for this
reason, the Secretary will consider the institution to be in compliance
with the requirement in Sec. 668.15(b)(5)(i) if the institution
demonstrates that it maintained an average monthly fund balance in its
cash reserve fund that was at least equal to the amount of the required
cash reserve. Lastly, because an institution must demonstrate its
compliance with the reserve-fund requirement by providing the required
information in a note to its audited financial statement, the
institution may, in lieu of establishing a separate cash-reserve fund
for each of its locations, establish a single cash-reserve fund that
represents the institution's combined refund exposure for all
locations. To enable the Secretary to make a determination regarding an
institution's compliance with this provision, the refund experience and
cash reserve requirement for each eligible and participating
institution shall be disclosed separately in the required footnote.
Changes: Section 668.15(b)(5) is amended to require that,
institutions not coming within the performance-based exception set out
in Sec. 668.15(d)(1), must submit to the Secretary an irrevocable
letter of credit, that is acceptable and payable to the Secretary, for
an amount equal to at least 25 percent of the total amount of title IV,
HEA program refunds the institution made, or should have made, during
the institution's last complete fiscal year.
In addition, the Secretary makes the following conforming changes
to Sec. 668.15(d), Exceptions to the general standards of financial
responsibility. First, the Secretary amends Sec. 668.15(d)(1) to exempt
from the requirement to submit an irrevocable letter of credit, an
institution that (1) has its liabilities backed by the full faith and
credit of a State, or equivalent governmental entity, or (2) any
institution that has, for both of its two latest consecutive fiscal
years demonstrated, to the satisfaction of the Secretary, with the
support of an audited financial statement submitted in accordance with
Sec. 668.15(e) and Sec. 668.23(c), that it has made all of its required
title IV, HEA program refunds in accordance with the ``timely payment''
provisions in Sec. 668.22(j)(4), and has for both of those years met or
exceeded the standards of financial responsibility under
Sec. 668.15(b). Second, in Sec. 668.15(d) the Secretary determines an
institution's compliance with the two-consecutive-year performance
requirement by evaluating (1) the institution's compliance audit
reports and audited financial statements covering that 2-year period,
and (2) any untimely refund findings during that two-year period from a
program review, a SPRE, other State agency or an independent auditor.
This section also requires the institution to have met the standards of
financial responsibility under Sec. 668.15(b) for the 2-year period. If
an institution is cited by an auditor for a condition that would no
longer permit it to use the exemption in 668.15(d)(1), the institution
must notify the Secretary of that fact within 30 days of receiving such
notice from its auditor, and must take immediate steps to secure the
required letter of credit.
The Secretary has made a conforming change to Secs. 668.15(b)
(7)(i)(A) and (8)(i)(B) by removing the reference to the cash reserve
fund in the delineation of items that would be included in the list of
institutional assets for the acid test analysis.
Acid Test Ratio
Comments: A number of commenters agreed with the Secretary's
decision to exclude from the calculation of the acid test ratio
uncollateralized receivables from owners and related parties.
Several commenters argued that the use of an acid test ratio, as
more of a test of liquidity than of assets, was contrary to
Congressional intent.
Other commenters believed that the acid test ratio was defined too
narrowly in the regulations to include as current assets only cash,
cash equivalents, and current accounts receivables. The commenters
noted that generally the acid test ratio is defined as current assets
less inventory divided by current liabilities. Such a definition would
allow other current assets not included in the regulatory definition to
be used in calculating the acid test ratio. However, the commenters
opined that an acid test ratio, regardless of how it is calculated, is
inappropriate and therefore not applicable to the education training
industry. The commenters argued that the short-term liquidity
requirements imposed by the acid test ratio would force an institution
to delay making capital investments to the detriment of its students.
To make a better assessment of the financial performance and stability
of an institution, some of the commenters suggested that the Secretary
should evaluate the significance of the ratio in view of other
financial indicators such as operating losses, negative equity, or
commercial loan defaults. Other commenters suggested that in view of
the new institutional oversight provisions under Part H of the HEA the
Secretary should adopt for these regulations the previous 1:1 current
ratio requirement. A few other commenters urged the Secretary to remove
the acid test ratio requirement because they believed that the new
audit requirements would provide safeguards sufficient to ensure that
an institution could meet its liabilities and remain operational. Still
other commenters suggested that if an institution failed to meet the
acid test ratio requirement, the Secretary should merely refer the
institution to the State for review under the provisions of the State
Postsecondary Review Program. Yet another commenter urged the Secretary
to adopt as a satisfactory measure of liquidity the acid test ratio of
between 0.5 to 0.75:1 suggested by the American Institute of Certified
Public Accountants (AICPA).
One commenter believed strongly that the Secretary should not allow
an institution to include accounts receivable on the asset side of the
acid test ratio because the receivables could not be readily
liquidated.
A few commenters believed that for purposes of calculating the acid
test ratio an institution should not be able to consider as a cash
equivalent the cash reserve under Sec. 668.15(b)(5). The commenters
noted that the cash reserve would be a restricted fund (i.e., used only
for the payment of refunds) and therefore would not be available to pay
the general debts of the institution. Thus, the commenters contended
that if the Secretary allowed institutions to include the cash reserve
as a current asset an otherwise insolvent institution might be able to
satisfy the acid test requirement. Another commenter agreed with the
provision that cash reserves should be included in the acid test ratio
but believed that the provision should be expanded to read as follows:
``Reserve funds created in accordance with Sec. 668.15(b)(5) may be
included as cash equivalents in calculating the institution's acid test
ratio.'' Still other commenters suggested that fixed assets, prepaid
expenses, and inventory be included in calculating the ratio.
One commenter noted that an institution could be financially stable
despite its failure to meet the 1:1 acid test ratio requirement. The
commenter opined that an auditor would be in the best position to
determine whether an institution was financially stable and suggested
that the Secretary require the auditor to make that determination based
on guidance issued by the AICPA regarding an auditor's responsibility
for determining an institution's ability to continue as a going
concern. The commenter suggested that in lieu of the acid test ratio
the Secretary should require an auditor to make a ``going concern''
determination and hold the auditor responsible for applying the AICPA
guidelines in making that determination.
Discussion: Section 498(c)(2) of the HEA directs the Secretary to
prescribe criteria with respect to operating losses, net worth and
assets-to-liabilities ratios to determine that an institution is
financially responsible. The Secretary maintains that the acid test
ratio is an appropriate measure of financial responsibility for an
educational institution because it provides a reliable measure of an
institution's ability to meet current obligations as they come due.
Because, in general, financial obligations must be satisfied in cash,
the Secretary has chosen an acid test ratio, because it relies only on
those assets that have the highest probability of conversion into cash.
The Secretary has chosen to exclude less liquid items such as
inventory, related party receivables, and prepaid or deferred items for
the following reasons: (1) As a provider of services, an educational
institution does not, in general, acquire and maintain significant
inventories of saleable products. Accordingly, for most educational
institutions, the exclusion of inventory from any calculation yields a
value that is not significantly different from one that would be
obtained if such inventories were included. Furthermore, because of
difficulties associated with the valuation of inventories, and the
existence of differing methodologies of accounting for inventories and,
because a distressed liquidation of inventory items by an institution
in financial difficulty may result in the realization of only a portion
of their actual value, comparability of inventory values among
institutions is extremely difficult. The Secretary, in seeking a fair
basis of comparison that is applicable to all institutions, chose to
exclude inventories from any calculation of liquidity;
(2) Related party receivables that are uncollateralized represent
unsecured claims on the assets of other businesses or individuals the
repayment of which is substantially at the discretion of the
controlling individual or business entity. While in many cases these
assets are accounted for as demand notes and hence they are
appropriately classified as current, they are in fact repayable at the
discretion of the controlling individual, and the Secretary has seen
institutions close for financial reasons without having demanded such
repayments from related parties. Because the Secretary cannot
reasonably determine the probability that such claims will be paid, the
Secretary believes that he is justified in excluding these items from
any calculation of liquidity; and
(3) In general, prepaid items and deferrals represent past outflows
of cash that may provide future economic benefits to an institution.
Because the realization of these assets depends in large part on the
continued existence of the educational institution, the Secretary
believes it is appropriate to exclude these items when evaluating an
institution at a fixed point in time.
The Secretary believes that a minimum ratio of at least cash and
current accounts receivable to all current liabilities is an
appropriate measure of an institution's ability to meet all of its
financial obligations. While many have argued that unearned tuition
liabilities do not represent financial claims on the assets of an
institution, and therefore should be excluded, the Secretary would
argue that unearned tuition liabilities are more accurately
characterized as cash collected from students in advance of providing
educational services. As these funds are not yet earned by the
institution, the Secretary believes that it is appropriate to require
that an institution have adequate liquid resources on hand to provide
refunds to students that withdraw or to fund a teachout should the
institution close at other than the end of an academic period.
Furthermore, while the Secretary concedes that such claims are not
direct financial claims comparable to a fixed debt they represent
obligations to perform a service. The performance of that service will
incur liabilities or the liquidation of assets over the next operating
period. Since a substantial portion of the unearned tuition income that
flows into an institution's revenue accounts is immediately expended to
provide for such things as instructor's salaries, rent, utilities and
other operational expenses, only a portion of unearned tuition
liabilities are ultimately realized as profit by the institution. It is
the Secretary's belief that a financially responsible institution
should be able to finance continuing operations out of earnings
retained as a result of past profits and not from the cash prepayments
of students who have yet to receive any educational benefit.
The Secretary believes that, for the most part, institutions that
make significant capital expenditures that are expected to benefit the
institution in future periods will finance those expenditures with
long-term financing arrangements. Accordingly, the Secretary believes
that capital acquisitions to the extent that they are externally
financed or funded from long-term sources of funds would not
significantly impact the acid test ratio. The Secretary recognizes that
a number of institutions incur significant expenses associated with
marketing and advertising and that many institutions refer to these
operating expenses as capitalized costs, often including these past
expenses as a current asset on the institution's balance sheet. The
Secretary believes that these costs are more appropriately
characterized as operating expenses and does not recognize such
capitalized assets in the acid test calculation.
Contrary to the opinion expressed in the comment, the AICPA does
not establish standards with respect to performance indicators such as
the acid test ratio.
While the Secretary does not agree that fixed assets should be
included in the calculation of the acid test ratio because such assets
are considerably less liquid than those that are included in the ratio
calculation, the Secretary does consider the institution's total
financial circumstances in determining an institution's compliance with
Federal financial responsibility standards. The Secretary includes in
his calculation of tangible net worth all the assets of an institution
to the extent that the value of these assets exceeds the institution's
liabilities after adjusting for intangible assets.
Changes: See conforming changes made as a result of comments on the
cash reserve requirement.
Exceptions to the General Standards of Financial Responsibility
Comments: One commenter was concerned that an institution that
participated in an inadequate State tuition recovery fund would be able
to avoid the more rigorous requirement in Sec. 668.15(b) under which
the institution would need to maintain in a separate fund a cash
reserve equal to at least 25% of the total dollar amount of refunds
paid by the institution in the previous fiscal year. The commenter
suggested specific criteria that the Secretary should consider in
determining the adequacy of a State's tuition recovery fund.
Specifically, the commenter suggested that in assessing a State's fund
the Secretary should consider (1) the maximum fund level, (2) the
current fund balance, (3) the amount of annual assessments collected by
the fund, (4) the amount of claims paid out by the fund, (5) the
authority of the fund administrator to levy against institutions
participating in the fund additional a

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A94-29048. Public record. Not legal advice.